Can Anything Stop Polaris' Drive Forward?

Recreational vehicle and towables giant Polaris Industries (NYSE: PII  ) has been on an unstoppable tear for the past 12 months, even while the U.S. economy at large has limped forward. Big-ticket purchases continue to defy overall consumer spending trends, and Polaris' ever-expanding line -- which now includes a revival of the iconic Indian motorcycle brand -- is riding the demand wave all the way to the bank. The company issued another round of stellar earnings last week, and management raised its prospects for the current quarter and full year. While current investors love the ride, is there room for those who are just now catching on?

Uphill trek
By nearly every measure, Polaris Industries' business continues to grow at an impressive clip. The company released its fiscal-first-quarter results last week to a delighted Wall Street, as the numbers depicted a record quarter for the company.

Net sales grew just shy of 20% to $888.3 million (a record figure for the first quarter), while operating income gained 24%, and the bottom line trekked up 11.2% to $1.19 per share. Some analysts bemoaned the slowing profit growth, as the gain represented a slower pace than much of the company's past several years. Still, the number beat analyst estimates by an average of $0.03. Looking at each segment, investors really shouldn't fear for the company's growth prospects.

Motorcycle sales are up 52%, driven by the aforementioned Indian revival. Off-road vehicle (ATVs and the like) sales are up 11%, and the small vehicle segment grew an absurd 248% -- again a product of new additions to the lineup via the recent acquisition of Aixam.

Due to the strong sales figures and the promise of more product expansion throughout 2014, management raised full-year guidance to as much as $6.45 per share. The high-end estimate would represent a 19% EPS gain over 2013.

Why it makes cents
Polaris Industries is a uniquely diversified company set to continue growing substantially in the long run. From its burgeoning small vehicles segment to snowmobiles, and even apparel, the company's relevance in the various niches is tremendous. The name is known for quality across the board. The Indian motorcycle revival, in the author's opinion, isn't a game-changer for the company, but it certainly goes a long way in the marketing department. Competing head-on with Harley-Davidson  (NYSE: HOG  )  (a company that is also delivering fresh models at a rapid pace) in this department is a hard battle. Still, it was a telltale sign when Harley Davidson introduced its eight new models (dubbed Project Rushmore) a moment before the Indian relaunch. Clearly, Harley management wanted to downplay the story of another American heavyweight motorcycle brand coming into the picture. 

A UBS analyst recently reported that Indian dealerships are sourcing 80% of the brand's sales from former Harley-Davidson riders. In a way, the market is Harley's to lose, and Polaris' to seek. 

Of course, then there is the matter of valuation. At nearly 18 times forward earnings, investors are paying up for this growth stock. If the economy reverses fortune, or credit gets substantially tighter, big-ticket purchases could take a dive. For price-conscious investors, it's important to realize there is decent downside risk at these levels. Given that Polaris is such a diversified vehicle maker, it can be tough to find a direct comparison. Harley-Davidson, which is obviously a pure play on the motorcycle business, trades just shy of 16 times forward earnings. Arctic Cat, a major brand in the snowmobiling world, hasn't had the same success as Polaris in recent periods and guided for lower sales back in January, but it also trades at a much less expensive 12.4 times forward estimated earnings. Polaris' outlook suggests the stock premium is worth it, in this case. 

One could compare the business to the infinitely larger vehicle giant Honda, as the company does make a variety of off road vehicles that compete with Polaris. Honda trades at just nine times earnings, but is ultimately a tough comparison, considering it is one of the largest vehicle manufacturers in the world (at a $60 billion market cap) compared to Polaris. 

Nevertheless, Polaris is a well-run business with a growing market share in every part of its business. The company has a history of increasing its dividend and a phenomenal debt profile, to boot. For those willing to pay the premium, it's a great business to own.

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